On 27 August 2024, the Hong Kong High Court¹ dismissed a banker's employment claim against his former employer for breach of the implied duty of mutual trust and confidence, and duty to exercise discretion in good faith in relation to the payment of a discretionary bonus. The alleged breaches related to the issuance of a warning letter, failure to grant a discretionary bonus and termination of employment by reason of redundancy.

The Plaintiff, Mr Yang, held senior roles at the Defendant, Nomura International (Hong Kong) Limited (Nomura), including Senior Managing Director, Chairman and CEO of the China region, and Chairman of Investment Banking for Asia ex-Japan group (IBD-AEJ Chairman). Nomura is a Japanese investment bank with an expertise in securities and futures contracts. Its Hong Kong branch is regulated and licensed by the Hong Kong Securities and Futures Commission (SFC).

On 29 September 2008, Mr Yang signed and accepted the following essential terms of employment:

• he would be eligible to receive a discretionary bonus;
• he was required to comply with Nomura's policies, guidelines and handbook;
• he was required to comply with Nomura's Code of Ethics as well as the SFC's Code of Conduct; and
• Nomura may take "Disciplinary Measures" against employees to address unsatisfactory conduct, behaviour or performance, which may include verbal or written warnings, suspension and dismissal.

On 9 April 2015, Mr Yang arranged and attended a meeting with Nomura's Head of China Equity Research and the CEO of Huatai Securities Co Ltd (Huatai). Following the meeting, Huatai formally appointed Nomura's investment banking division to assist with its IPO.

In May 2016, the SFC launched an investigation into Nomura and found there to have been substantial conflicts of interest created by the meeting between the research and investment banking departments. Following an internal investigation, Nomura issued Mr Yang with a written warning, suspended his role as Head of China and restricted his activities as IBD-AEJ Chairman. At the end of the financial year, Nomura decided not to grant a bonus to Mr Yang. Relations broke down and, by May 2017, Nomura notified Mr Yang that his employment would be terminated by reason of redundancy.

Mr Yang claimed Nomura had breached its implied duties to:

• "not, without reasonable and proper cause, conduct itself in a manner calculated and likely to destroy or seriously damage the relationship of trust and confidence between employer and employee"(the duty of mutual trust and confidence)² ; and
• exercise contractual discretion in good faith and not arbitrarily or capriciously (the Braganza duty).³

The court considered the duty of mutual trust and confidence to be "an overarching obligation" which should not be "suspended if the conduct [the employer] engages in happens to be carried out pursuant to contractual discretion".⁴ It therefore could be applied to Nomura's decision to not award a discretionary bonus. On application, the court found no intention on Nomura's part to destroy the relationship with Mr Yang, since "the parties had been engaging in discussions [...] with a view to achieving mutually agreeable terms of separation" and "preserving an amicable relationship".

By contrast, the court held that the duty of mutual trust and confidence would not apply to Nomura's decision to terminate Mr Yang's employment,⁵ as the "duty of trust and confidence only relates to the maintenance of the ongoing employment relationship" not termination.⁶

The court also refused to apply the Braganza duty to Nomura's decision to terminate Mr Yang's employment. The very nature of the right to terminate without cause was that it was an unqualified right.⁷For the same reason, the court held that three implied terms advanced by Mr Yang under this duty (the "Fair Termination Term", the "Good Faith and Rationality Termination Term", and the "Legitimate Expectation Termination Term") could not be implied into the contract as they would "impermissibly water down" Nomura's express contractual right to terminate. This follows the previous High Court decision of Lam Siu Wai v. Equal Opportunities Commission.⁸ However, the court also qualified this by way of reminder that the unqualified right to terminate an employee could still be "limited where such termination is to avoid the employee either becoming eligible for consideration for a bonus award or receiving a bonus award", which principle now known as the implied anti-avoidance term, derived from the 2016 Court of Appeal decision in Tadjudin Sunny v. Bank of America, National Association.⁹

In terms of the Braganza duty, the court agreed it was applicable to the bonus scheme for the same reasons as the duty of mutual trust and confidence. The relevant test for determining whether the decision not to award Mr Yang a bonus breached this duty was:

• whether, in making the decision, Nomura took into account all relevant considerations and excluded irrelevant considerations; and
• whether the result was so outrageous that no reasonable decision-maker could have reached it. "Reasonableness" here was a higher than usual standard and would be more akin to "rationality". To assess "rationality", the court would look at the process for determining the bonus and whether there was "some logical connection between the evidence and the ostensible reasons for the decision".

The court found that Nomura had considered all relevant factors in making its decision regarding the bonus, including the SFC findings, the poor performance of the China IBD team and Mr Yang's expressed desire to leave the company. It was found that the bank's decision was not irrational, given the gravity of Mr Yang's misconduct and the collective decision-making process behind it. The Braganza duty had therefore not been breached.

The court ultimately found that Mr Yang had failed to manage perceived conflicts of interest and that Nomura had acted reasonably and in accordance with its duties. Mr Yang's claims were dismissed and he was ordered to pay costs.

Some eight years after Tadjudin Sunny, disgruntled ex-employees are still relying on the implied term of mutual trust and confidence, the Braganza duty and the implied anti-avoidance term to assert claims after being terminated. See, for example, Haveaux Xavier Marie-Ghislain v. Hong Kong Express Airways Limited.¹⁰

Employers will be comforted to see that the court will only permit claims based on these various implied terms where a claimant can show the duty was applicable to the relevant circumstances and can prove breach. They cannot be used as a catch-all cause of action to advance claims, particularly where an employer has properly exercised its unfettered right to lawfully terminate an employee.

Acknowledgements to trainee solicitor Jasper Cao and Faith Colenutt for research and contribution to this article.

1. Yang Zhizhong v. Nomura International (Hong Kong) Limited [2024] HKCFI 2192.
2. Malik and another v. Bank of Credit & Commerce International SA (in compulsory liquidation) [1998] AC 20.
3. Braganza v. BP Shipping Ltd and another [2015] 1 WLR 1661.
4. Faieta v. ICAP Management Services Ltd [2017] EHWC 2995 (QB).
5. Lam Siu Wai v. Equal Opportunities Commission [2021] 5 HKLRD 30.
6. Shek Kin Pong and others v. FTLife Insurance Company [2019] HKCFI.
7. Shek Kin Pong and others v. FTLife Insurance Company [2019] HKCFI.
8. Lam Siu Wai v. Equal Opportunities Commission [2021] 5 HKLRD 30.
9. Unreported, CACV 12/2015, 20 May 2016.
10. [2023] HKCFI 2073.